Roth IRA Conversions: What to Consider

Yesterday, we explored some of the nuts and bolts of converting traditional IRAs to Roth IRAs. Today, we'll look at some items you should consider when thinking about converting.

Investors' personal IRAs are eligible for conversion. So are IRAs inherited from spouses. However, other inherited IRAs are not eligible for conversion.

Once IRAs have been converted, you have to hold the assets in the Roth IRA for either five years or until you turn 59½ before you start withdrawing the converted amount. In addition, the "earnings" on those assets must remain in the Roth IRA for at least five years before they're withdrawn, regardless of your age. Otherwise, such withdrawals result in a 10 percent early withdrawal penalty.

It's also important to note that a conversion is not necessarily permanent. If the conversion ends up being a mistake, the conversion can be recharacterized back to a traditional IRA without penalty if done in a timely manner. For example, if an investor converts an IRA to a Roth IRA and then experiences a drop in the account's value, it may make sense to recharacterize the account back, then convert at a later date and pay less tax.

Tomorrow, we'll look at some questions you should ask yourself when considering a Roth IRA conversion.

Follow the series: Roth IRA Conversions

• Part one: Why All the Fuss?
• Part two: How They Work
• Part three: What to Consider
• Part four: Conversion Questions
• Part five: Summary